Shedding Light On Global Commerce

In the summer of 1997, I drove through the 17th century Chinese philosopher’s Zhu Bolu’s hometown. The Village of Kunshan had posted a large sign, in Chinese, above the highway that read, “Mend the roof while the weather is fine, and dig the well before you’re thirsty.” Simply interpreted: Get your house in order to minimize disaster. The poster’s purpose was to call the country to arms to prepare for China’s propitious future. Deng Xiaoping, the leader of China at the time and the individual generally credited with not only advancing China, but creating one of the fastest-growing economies in the world, had his coined aphorism added underneath Zhu Bolu’s: “To get rich is glorious.” These Chinese catchwords were commonly peppered on signs throughout the landscape in China, and the message served as a jingoistic impetus that helped drive China’s gross domestic product (GDP). The country’s GDP growth rate has consistently been over 10 percent annually for the past 10 years, approximately three times greater than the rest of the world.

Today, the surge in U.S. imports from China is viewed by many as a threat to various U.S. economic sectors, particularly in manufacturing. China’s seemingly unlimited pool of low-cost labor is viewed by some as a serious competitive threat to U.S. manufacturing and is blamed for bankruptcies and/or plant relocations to China, in addition to job losses. Chinese factories are moving up the economic ladder and are now producing higher value-added products. Managerial skills are improving, training is prevalent and tools such as lean manufacturing and Six Sigma are being employed throughout China today. As a result, companies in China and their employees are becoming more efficient. Under these circumstances, it is no wonder that productivity in China is on the rise. Though, it is likely to worsen as China begins to manufacture more advanced products that compete directly with those made by U.S. domestic firms.

So, how can small businesses in the United States compete with China’s inevitable threat? A common misconception regarding China’s success is that the country has lower labor costs; however, it is not simply lower labor rates that threaten U.S. small business. The Chinese are feverishly getting their house in order in a meticulous fashion and learning as much as possible about our weaknesses, strengths and technology, so that focused management and productivity— not simply labor costs—will bring change in the relative economics of the world.

However, the following excerpt, taken from an article written by Sheridan Prasso on May 7, 2010, for Fortune magazine, indicates that the gap between manufacturing costs in the United States and China is lessening. “About a mile past the Bountiful Blessings Church on the outskirts of Spartanburg, S.C., make a right turn. There, tucked into an industrial court behind a row of sapling cherry trees not much taller than I am, past a company that makes rubber stamps and another that stitches logos onto caps and bags, is a brandnew factory: the state-of-the-art American Yuncheng Gravure Cylinder plant. Due to open any day now, it will make cylinders used to print labels like the ones around plastic soda bottles. But unlike its neighbors in Spartanburg, Yuncheng is a Chinese company. It has come to South Carolina because by Chinese standards, America is darn cheap.

Yes, you read that right. The land Yuncheng purchased in Spartanburg, at $350,000 for 6.5 acres, cost one-fourth the price of land back in Shanghai or Dongguan, a gritty city near Hong Kong where the company already runs three plants. Electricity is cheaper too: Yungcheng pays up to 14¢ per kilowatt-hour in China at peak usage, and just 4¢ in South Carolina. And no brownouts either, a sporadic problem in China. It’s true that American workers are much more expensive, of course, and the overall cost of making a widget in China remains lower, and perhaps always will.

But for hundreds of Chinese companies like Yuncheng, the U.S. has become a better, less expensive place to set up shop. It could be the biggest role reversal since, well … when Nixon went to China. […] Chinese companies have invested $280 million and created more than 1,200 jobs in South Carolina alone.”

In the summer of 1997, shortly after the British handover of Hong Kong to China, a Chinese comrade invited me to Wuhu to see one of the only car manufacturing plants in China at the time. Fluent in Mandarin, my background includes exporting vehicles and other goods out of China where I lived for nearly five years. Mr. Zhang was an early mentor of mine and helped me weave through the complex relationships required to conduct business. We would meet periodically to discuss the sometimes notso- transparent tariff regulations. At the time, Beijing taxed imported auto parts at the same rate as completed automobiles if more than 60 percent of the parts for finished vehicles were imported. The tariff on an imported car was 28 percent; the tariff on auto parts ranged from 10 to 14 percent. Therefore, the objective was to work within the regulations to export Mercedes in pieces and reassemble them inside China using Chinese labor.

This particular meeting helped me gain a clearer understanding of what goes into exporting Mercedes into China. It also provided me a significant advantage when planning my own business enterprise. I remember Mr. Zhang’s office was awash with books, such as Harvard business magazines and lean management material. One book stood squarely in the middle of his desk: Sun Tzu’s “The Art of War.” Mr. Zhang, the chairman of FAW Enterprises, was quick to point out that “The Art of War” was essential reading for all businessmen in China— it was like the Chinese business bible.

Twenty-five hundred years ago there was a period in China known as the Age of Warring States. This was an age of great turmoil, as seven states fought for survival and control of China. In order for these states to win, they needed to use any means necessary to gain an advantage over their opponents. As such, those with knowledge on strategy and leadership were especially sought after. It was during this time a general known as Sun Tzu arose from the state of Chi. His ability to win victories for his warlord gained him fame and power. In an effort to hand down the wisdom he had gained from his years in battle, Sun Tzu wrote “The Art of War”, which became a classic work on strategy and planning.

Because business, like warfare, deals with competition, Sun Tzu’s principles are ideally suited for competitive situations. “A general should know the importance of variables in order to win the battle,” Mr. Zhang often barked to his plant managers. “The Art of War” emphasizes the importance of comparing your scores to that of your competitors, and if your score is lower in any critical variable, it’s time to develop the necessary strategies needed to advance your position.

Mr. Zhang once shared his favorite quote with me: “If your enemy is superior, evade him. If angry, irritate him. If equally matched, fight, and if not, split and reevaluate.” Mr. Zhang believed his meticulous planning made him appear spontaneous, but, in reality, he was prepared to execute decisions quickly despite challenges. He informed me his eventual goal was to overcome the Japanese and American automobile markets. Remarkably, 12 years after that meeting, China officially became the largest automobile producer and market in the world—and Mercedes is producing many of its E- and C-Class models in its joint venture in Beijing!

Nowadays, my children refer to me as a business doctor for small businesses. I help clients learn about their competitors and realize that intelligent and disciplined planning can be used to overcome the chaos of the business world. After analyzing more than 3,000 clients with ABS Consulting, I have found a recurring theme—lack of a moving business plan or the poor implementation of a plan is typically the number-one reason for business failure or stagnation.

So, why do small businesses neglect to plan? The primary excuse I hear is that the owner is too busy working in the company; therefore, he has no time to work on the company. In reality, proper planning can be a very difficult process and I find most of my clients lack knowledge regarding how to effectively plan; or, they feel the future cannot be planned. Relying solely on luck to be successful when operating a small business is a significant gamble and this strategy is often met with failure.

Today’s financial environment is incredulously difficult. If a small business doesn’t plan a proactive course through the new maze of political, economic and tax challenges, the company will undoubtedly crumble. As a small business owner, you must know where you are going and how to get there. An established course will help guide you when operating your business; attract investors and bankers to finance your business; provide direction and motivation to your employees; and establish an environment that will attract and retain customers and talented workers. Furthermore, a well-designed business plan incorporates tax planning to help increase cash flow, protect assets and facilitate eventual succession. Planning helps a business owner steer his company to a destination with direction and confidence, despite potential detours along the way. With a global positioning system, small businesses can reposition themselves in the global market if they mend their roofs and dig their wells.